Sourcing Optimisation part 3 — the key benefits

In the final installment of a three-part series, Alan Gleeson of Keelvar, explores the key benefits of sourcing optimisation and what conditions lend themselves to its use.

So what are the key benefits of Sourcing Optimisation?

Sourcing optimisation starts from a strategic perspective. The approach is grounded in ensuring the tender exercise is designed upfront in a manner which is likely to secure the best downstream outcome for the purchaser.

The more open and expressive competition format is designed to increase the competitive tension amongst suppliers, while also enabling suppliers to: hedge their risks; make reasoned bids; play to their strengths. Allowing suppliers to signify capacity constraints also lets them bid on more work than they can service, increasing competition across all lots. Hence a smaller supplier can bid on 20 lots, but limit their exposure by capping the number of lots they can win at the appropriate capacity level.

Hence key benefits include the ability to:

1. Elicit savings without ‘squeezing suppliers’

The approach focuses on eliminating waste (in an economic context) by ensuring more efficient sourcing. As Peter Smith claimed in his recent post on Market Informed Sourcing:

"I know firms that believed they had executed category management well for years and that there could not possibly be more gains to be made. They introduced MIS – and saw a further 10 to 20% cost reduction, as well as other benefits (including happier suppliers, interestingly – one of the not uncommon outcomes we have seen from the process)."

2. Save time on evaluation

Sourcing optimisation applications like Keelvar’s rely upon a powerful evaluation engine designed to compute the best outcomes in a matter of minutes. Without evaluation engines it would be impractical to evaluate all permutations via Microsoft Excel. Similarly, by automating the evaluation process the risk of error is also reduced significantly.

3. Allow greater control over outcomes with business constraints

Private sector sourcing has greater flexibility compared to the public sector, and hence can leverage a range of additional business constraints/ features designed to enable buyers to invoke everything from anti-cartel deterrence mechanisms to scenarios which assess the costs associated with incumbency switching. Want to assess the trade off’s moving from 2 to 3 to 4 suppliers? Run a scenario taking the cost of the additional admin headcount, and switching costs into consideration.

4. Use without training

While this series of posts does not assess the main sourcing optimisation players, it is evident that newer players like Keelvar (Disclosure: which I work with) are very focused on creating easy to use Software-as-a-Service (SaaS) solutions that do not require training. I suspect many of the other players are also headed this way as users increasingly demand B2C levels of design and intuitive software interfaces.

As Al Collier, Head of Procurement, Norfolk County Council remarked in a recent Spend Matters interview on utilising sourcing optimisation:

“We have achieved better access for SMEs, and cost reduction – but we suspect the contract is also more profitable for the market, because of the choices the bidders could express.”

Finally, it is worth pointing out the approach is not designed to pit SMEs against large companies, rather to let all participants play to their strengths.

Where does Sourcing Optimisation work well?

There has been a common misconception that sourcing optimisation is exclusively the preserve of the largest of companies with the most complex sourcing requirements. However, this is not the case, as most exercises, can benefit from its use, provided the buyer is content with split award contracts (where they contract with more than one supplier). After all, the approach is based on creating competitive tensions amongst suppliers. It is therefore important to adapt a lotting approach at the start where demand is broken down into granular lots/ line items/ routes as described in the previous article.

Its application is particularly powerful where there is some geographical dispersion, so perhaps multiple suppliers serving different locations including facilities management, transport, logistics, retail, domiciliary care, travel, pharmaceuticals and so on.

Similarly, the level of savings attainable is contingent on a number of factors including incumbent supply base and previous tender designs, but the larger the spend amount the greater the savings relative to the cost of optimising.

Finally, it is also worth noting at this juncture, from a compliance perspective (public sector), that buyers need to ensure that the appropriate award criteria wording is included in the RFPs/ RFQs upfront so the basis of the award is fully transparent and compliant. Hence sourcing optimisation is not an approach that can be parachuted in half way through a process. Taking a strategic perspective upfront ensuring the approach to market is a considered one as part of the initial engagement is a key tenet.

In summary, sourcing optimisation looks like it is finally coming of age. It’s more strategic grounding, coupled with a focus on ensuring a vibrant competitive supply base ensures that the outcomes are closely aligned with the requirements of senior procurement leaders. Offering speedy evaluation, in an approach designed to enable suppliers share gains made from them reducing their cost to service truly delivers a win- win outcome. And that is a refreshing change given the more adversarial zero-sum approaches that there have been to the fore.

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